New Ways to Think about Your Financial Future

We’ve heard it all before: save a million dollars for retirement; max out that RRSP; and by all means, put that extra money – you know, the overflowing funds you have no idea what to do with after you’ve maxed out your RRSP – into your TFSA.

The old advice is tried and true, but it simply doesn’t hold up for everyone. Instead, you should be asking yourself key questions, such as: what do I want my retirement to look like? Will I fund my child’s entire post-secondary education or expect them to work? Is maxing my RRSP a better option this year than paying down large loans?

The truth is, many Albertans are in no position to max out anything besides their credit cards. Last year saw Edmonton’s non-mortgage debt average out at $24,354. With the tight reality of many consumers in Alberta, it’s time to look at new ways to think about your financial future.

Brian Betz is a debt counsellor at Money Mentors. When asked if it was best to save for retirement or to invest when one is already carrying significant consumer debt, he said, “I wish there were black and white answers to everything! It would make our job so much simpler!”

Then he got down to the nitty gritty. “The first thing that comes to mind would be, if you are carrying significant consumer debt, you have to ask yourself why. To me, that indicates that something is wrong, and the most common issue is continuing to borrow money to fund a lifestyle you can’t afford.

“What you need to do is have a hard look at your income and expenses. Understand what is coming in and what is being spent. That’s a big eye opener for a lot of people. Once we determine that, we can look at the question of if it’s consumer debt. If so, what is the interest rate? How much is the debt? How much is the payment? There may be a way to pay debt and save for retirement, but a lot of that goes to income level.

Should one cash out a retirement product to pay down debt? Again, Betz says the answer is, “it depends.”

“The common answer is that it’s not a good idea to cash out a retirement product,” he notes. “You are only allowed to contribute so much to an RRSP, and if you cash it out, you can’t replace that contribution. Having said that, you have to look at what kind of investments you have in your retirement products and what kind of return you are getting. Do I have $100,000 in an RRSP versus $5,000 in consumer debt? Then, why do I have that debt, what can I do with my budget to figure it out?

“If you are 30 years old and your goals have changed and you want to pay off that debt, you have enough time to replace [an RRSP] before retiring. If you are 55, that’s a different scenario. Cashing in retirement products is the last scenario I would advise looking at. It’s just too hard to replace.”

One of the best things anyone can do for their finances, especially if they carry debt, is talk to a professional.

“People are afraid of the term ‘debt,’ Betz says. “They think, ‘oh boy I have to do something I don’t want to do, like a diet says I can’t eat what I want.’ Don’t think of it that way! If you just want to do better with your money, have questions about where the money going or how to achieve a goal: ask for help. You don’t have to be in a serious debt situation to ask. Access the tutorials on our website or get free consultation on the phone, in person, or over Skype. We are not going to try to sell you anything. We can consolidate at a low interest rate to provide education and opportunity.”

Spencer Bennett, financial advisor, Edward Jones, says a key part of financial planning comes down to the “planning” part of the equation.

“One of the most common mistakes is that people often don’t have a plan,” he says. “If they do, it may not be including some important factors, like inflation, extra expenses, etc. Many people also think their work group plan is enough to retire on. This is seldom the case. Setting up a monthly contribution and sticking to it can go a long ways. I would recommend seeking the advice of a financial advisor to make sure you have a properly prepared and regularly reviewed plan. It is also important to make sure you are taking appropriate risks. Don’t be shy to ask how much your advisor is charging you, and what your returns are. The value your advisor provides should be greater than the fees they charge.”

He also puts aside the one-size-fits-all approach in favour of tailored plans for each individual, especially when it comes to risk, and he encourages his clients to keep an open mind about the best path to their goals. His key points for consumers are:

“It is important to have a proper risk tolerance done, and a discussion on volatility.

“Sometimes, debt repayment (especially high interest debt) should be a bigger priority than saving for retirement. High interest debt comes with a guaranteed loss, while most investing does not come with a guaranteed gain.

“Some people also tend to have a hometown bias when it comes to investing. It is important to diversify your equities across the global stage, not just in the country or sector you may live and work in.

“Using registered accounts (RRSPs and TFSAs) can be a great way to save money on taxes, but first check with your accountant to make sure they are best for you and your financial situation.

“Where appropriate, life insurance (including permanent solutions, such as whole life) can provide a great solution for estate planning. Life insurance usually pays out tax free, and can be a great way to provide for the needs of the surviving family members. Edward Jones, its employees and financial advisors are not estate planners and cannot provide tax or legal advice. Please consult a qualified tax

specialist or lawyer for professional advice regarding your specific situation.”

Bennett summarizes, “Meet with an advisor who takes time to learn what’s important to you and your family; that helps create a personalized financial strategy to help you reach your goals.”

Chris Turchansky, president, ATB Investor Services, agrees.

“It all starts with an advisor who will take the time to understand a client at a very deep level and develop a plan and solutions that fit the situation,” says Turchansky. “Rules of thumb, like ‘save $1 million for retirement,’ help to reduce complexity and can be a guide; however, the reality is that everyone’s situation is unique, and so is what they are saving for. The advice that clients receive should be tailored to their situations.”

He continues, “The complexity in the investment world continues to increase, resulting in a number of people who are putting off getting started. Individuals should focus on finding an advisor or company they trust and looking for smart, simple, and helpful solutions that minimize the complexity of investing. As clients pass through their 20s into their 30s and 40s, it is important to continue to make sure their investment solutions are aligned to their time horizon. Although the end product is important, creating a plan, having a diversified portfolio that matches the risk an investor is comfortable with, and controlling costs are key.

“A financial plan is a living document that provides an investor with confidence and peace of mind that they are on the right track to achieve their goals.”

What’s the best way to think about your financial future? The way that makes the most sense for you, be it travelling the world during retirement or downsizing to a cozy cottage, putting the kids through school or buying rental property, paying off debt or buying a house – it’s your money, it’s your plan, and the right financial advisors will help you achieve the goals that mean the most to you.